Paradex Europe Windstorm uses a parametric index to calculate insured loss estimates
Risk Management Solutions (RMS) has launched a parametric index for assessing insured industry losses from windstorms in Europe.
Paradex Europe Windstorm combines wind speed measurements in specific locations with industry exposure data, and uses the modelled relationship between wind speed and damage to calculate insured loss estimates.
“As the market for insurance-linked securities has grown, the industry has been searching for loss indices to help structure deals,” commented Peter Nakada, managing director of RMS Consulting. “In the U.S., catastrophe bonds and industry loss warranties have been structured off an index called the Property Claims Service, but until now there has been no reliable and objective equivalent for windstorm risk in Europe.”
Paradex uses the RMS® Europe Windstorm Model and Industry Exposure Database to analyze the impact of wind speeds on insured loss by location, known as CRESTA zone.
Residential, commercial, industrial, and agricultural lines of business are covered across Austria, Belgium, Denmark, France, Germany, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.
“The process for calculating industry losses is based on impartial data, so there is no room for biasing calculations. Wind speeds are obtained directly from European meteorological offices, averaged by CRESTA zone and then mapped to an industry loss using simple reference tables,” said Albert Essiam, manager of the Paradex division of RMS. “These wind speed loss tables are available upfront to investors, as well as insurers and reinsurers, providing a transparent view of how the loss estimates are derived.”
RMS said, ‘Paradex Europe Windstorm provides an initial loss estimate 10 business days after an event, and settles definitively no more than 40 business days after. Because it is an objective standard for trading windstorm risk, securities that are structured on the index should become more liquid.’
“Increased transparency, simplicity, and liquidity for investors translate into better execution for issuers,” commented Albert Selius, managing director at Swiss Re. He added: “Catastrophe bonds can involve a vast amount of documentation about how the parametric triggers will work. By embedding all the calculation mechanics into an index, the documentation for each security becomes far more straightforward, so the bond can get to market much quicker.”
“The beauty of this index is that an issuer can keep its basis risk down by tailoring the index to match its portfolio by location and line of business. Investors, on the other hand, get the benefit of a pure windstorm bet, as recorded wind speeds are the only live input into the calculation,” commented Peter Nakada. “We believe this index could be the catalyst for a parametric revolution, where substantial amounts of peak peril hazard risk will be transferred to the capital markets.”